Ambiguity not shown by negative implication

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“Ferreting through a policy to dig up ambiguity should not be judicially rewarded because this sort of ambiguity is insufficient. Rather, inconsistencies in the context of a policy must be material to the issue in dispute.” Hon. David T. Prosser Wisconsin Supreme Court

Where an automobile policy limits bodily injury liability, regardless of the number of insureds, the policy is not ambiguous merely because the policy more explicitly limits liability for property damage, a unanimous Wisconsin Supreme Court held on July 16.

In doing so, the court reversed a published decision of the court of appeals, Folkman v. Quamme, 2002 WI App 237, 257 Wis.2d 864, 652 N.W.2d 406.

In 1998, 17-year-old Keith Folkman was driving a vehicle owned by his parents, Debra and Kenneth Folkman, Sr., when it collided with another vehicle. Debra and another son, Kenneth Folk-man, Jr., were passengers in the car. Debra incurred approximately $76,000 in medical expenses, and Kenneth Jr. became permanently paralyzed as a result of the accident.

Both Keith Folkman and Sheri Quamme, the driver of the other vehicle, were at fault for the accident.

The car driven by Keith was insured by a Society Insurance policy issued to Debra Folkman. The policy also covered Kenneth Folkman Sr., Keith Folkman, and a third son, who was age 16, as drivers. Both of Keith’s parents had sponsored Keith’s license to drive, and therefore, Society insured both Debra and Kenneth Sr. for sponsorship liability imputed to them by Keith’s negligence.

According to its declarations page, the policy included a “split limit of liability” for bodily injury of $25,000 for “each person” and $50,000 for “each occurrence.”

An endorsement to the split liability limits contained two paragraphs. The first set forth the “maximum limit of liability for all damages” for bodily injury per person, and per auto accident.

The second paragraph set forth the “maximum limit of liability for all ‘property damage’ resulting from any one auto accident. The same paragraph then stated, “This is the most we will pay regardless of the number of: 1. ‘Insureds;’ 2. Claims made; 3. Vehicles or premiums shown in the Declarations; or 4. Vehicles involved in the auto accident.”

After unsuccessfully attempting to resolve coverage issues, Kenneth Sr., Debra, and Kenneth Jr. (the Folkmans) jointly brought suit against Keith and Society, in addition to Quamme and her automobile insurer, to collect damages related to bodily injuries stemming from the accident.

Society acknowledged Keith’s responsibility for the accident, but sought to limit its liability to $50,000. The Folkmans sought $125,000, arriving at this figure as follows: (1) Keith had liability to Debra and Kenneth Jr., for a maximum of $25,000 to each; (2) Debra was liable to Kenneth Jr. as Keith’s sponsor for a maximum of $25,000; and (3) Kenneth Sr. was liable to both Debra and Kenneth Jr. as Keith’s sponsor, for a maximum of $25,000 to each of them.

The Folkmans argued that Society’s $25,000 “per person” and $50,000 “per occurrence” limits of liability must apply separately to each of the three insureds.

Brown County Circuit Court Judge Mark A. Warpinski construed the Folkmans’ policy to limit Society’s liability to $50,000 per accident, regardless of the number of insureds liable for that accident.

The Folkmans appealed, and the court of appeals reversed, holding the policy ambiguous. Construing the policy against the insurer, the court of appeals determined that Society was obligated to pay up to its limits of liability for each of the three insureds under the policy. The Supreme Court accepted review, and reversed the court of appeals in a unanimous decision by Justice David T. Prosser.

Guiding Principles

The court began with the following principles, “Some ambiguity is unavoidable because words are unable to anticipate every eventuality. But other ambiguity is the result of the insurer’s imperfect preparation of the policy. A clearly written policy promotes a good relationship between the insurer and the insured and protects the insured from future misunderstandings. The insurer’s best defense against an unwarranted but appealing claim is an unambiguous policy.

“Occasionally a clear and unambiguous provision may be found ambiguous in the context of the entire policy. Insurers dislike this principle. Yet, the opposite principle — that courts must mechanically apply a clear provision regardless of the ambiguity created by the organization, labeling, explanation, inconsistency, omission, and text of the other provisions in the policy — is not acceptable.”

The court added, “The language of a policy should not be made ambiguous by isolating a small part from the context of the whole,” and concluded that, applying this principle, the limits of liability in the policy cannot be considered ambiguous.

Last term, in Badger Mutual Insurance Co. v. Schmitz, 2002 WI 98, 255 Wis. 2d 61, 647 N.W.2d 223, the court held that a reducing clause in a policy containing underinsured motorist (UIM) coverage became ambiguous when it was read in the context of the entire policy, even though the clause itself was unambiguous when read in isolation, and conformed to sec. 632.32(5)(i).

The court agreed with Society that, “any contextual ambiguity in an insurance policy must be genuine and apparent on the face of the policy, if it is to upset the intentions of an insurer embodied in otherwise clear language.” The court further acknowledged “an unintended effect of some language we used in Schmitz” — that reducing clauses must be “crystal clear.”

The court stated, “A series of court of appeals decisions decided post-Schmitz reveals that our admonition of ‘crystal clarity’ has been used to alter the analytical focus. Rather than assessing whether a policy, as written, is ambiguous in context, insurers are being required to undertake affirmative, explanatory responsibilities in drafting policies. Aspirational goals and admonitions on how to avoid ambiguity are admittedly different from minimum legal standards.”

Stating that Schmitz does not demand perfection in draftsmanship, the court added, “To prevent contextual ambiguity, a policy should avoid inconsistent provisions, provisions that build up false expectations, and provisions that produce reasonable alternative meanings.”

The court asserted, “Ferreting through a policy to dig up ambiguity should not be judicially rewarded because this sort of ambiguity is insufficient. Rather, inconsistencies in the context of a policy must be material to the issue in dispute and be of such a nature that a reasonable insured would find an alternative meaning.”

Application

Turning to the policy, the court looked first to the declarations page, in which the court found no ambiguity that could imply more extensive coverage, and second to the “Split Liability Limits” endorsement, which the court also found unambiguous.

The court also noted that the language in the policy is not novel. Instead, “It is a standard policy comparable to hundreds of thousands of automobile insurance policies in Wisconsin. The basic provisions have been interpreted countless times. If we were the first court to see this policy, we might be more amenable to the statements by the court of appeals that ‘it is still not clear how the “limit of liability” on the declaration page is to apply when more than one insured is liable for bodily injury caused by an accident,’ Folkman v. Quamme, 257 Wis. 2d 864, par. 10, and ‘it is reasonable to read the phrase “maximum limit of liability” to mean the maximum limit of liability for all insureds, rather than for each insured,’ id., par. 12. But we are not the first court to see this policy.”

The court found that, given the policy language’s long history of interpretation, it was reasonable for the insurer to rely on the language to limit its liability to $50,000 per occurrence.

The court also noted that the policy at issue was purchased at the minimum level required by law and did not even include UIM coverage. The court added, “the subjective interpretation of terms by the insured is not relevant. However, the extent of the insurer’s coverage is one of the few terms of the policy that requires discussion between the parties. When Debra Folkman purchased the policy, she must have ins
tructed her agent how much insurance she wanted to purchase, what vehicles she wanted to cover, and which drivers she wanted to cover, because this information is reflected on the declarations page.”

The only ambiguity that the court did find is the placement of the statement that, “This is the most we will pay …,” in the endorsement to the “Split Liability Limits.”

The endorsement is split into two paragraphs, one relating to bodily injury and the other to property damage. Only the second paragraph, concerning bodily injury, contains the language, “This is the most we will pay…”

Society conceded that this was a “typographical error,” and that the language should be, and usually is, in a third paragraph, describing both of the preceding two.

The court accepted this explanation, stating, “Whatever error there may be in the placement or grammatical structure of the ‘This is the most we will pay” sentence in Society’s split liability limits endorsement, the policy remains unambiguous regarding Society’s obligation to indemnify its insureds for no more than $50,000 for bodily injuries from any one accident. After examining the whole policy, we find it unreasonable for an insured to infer from this one errant sentence that the insured was greatly expanding the policy’s coverage and confining its liability limit to property damage.”

Distinguishing Schmitz, the court noted that the ambiguity in that case was “based on a confluence of factors,” and the court reviewed four ways in which the Schmitz policy was contradictory.

In contrast, the court found, “In the Folkmans’ policy, there is an informative declarations page that lays out the limits of liability. Courts cannot ask for an informative declarations page and then fault the insurer for failing to address every nuance and speculative interpretation of coverage that an insured might raise. The Society policy is clearly organized with a good index that, in four different places, refers to limits of liability.”

In addition, the policy contained no direct contradiction, but only a potentially negative implication.

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The court thus concluded, “Here, an unreasonable negative implication must compete against clear text. The alleged ambiguity is not founded on contradictory language.

We conclude that the limits of liability provision is unambiguous, particularly when it is examined in the context of the whole policy.”

Omnibus Statute

The court further found that the policy did not violate the omnibus statute, sec. 632.32(3), which requires that every policy provide coverage for all individuals with permission to use the vehicle.

The court agreed with the reasoning of two cases, Miller v. Amundson, 117 Wis. 2d 425, 345 N.W.2d 494 (Ct.App.1984), and Iaquinta v. Allstate Ins. Co., 180 Wis. 2d 661, 510 N.W.2d 715 (Ct.App.1993), in which the court of appeals interpreted the omnibus statute to double liability coverage, notwithstanding the limits of liability in the policies, because the negligence of two insureds in each case was a separate occurrence.

Nevertheless, the court distinguished the two cases, and instead found the Folkmans’ case to be governed by a different court of appeals’ decision, Landsinger v. Am. Family Mut. Ins. Co., 142 Wis. 2d 138, 417 N.W.2d 899 (Ct.App.1987), in which the court held that imputed negligence does not constitute a separate occurrence that would double liability limits.

Accordingly, the court reversed.

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David Ziemer can be reached by email.